NEW DELHI : Indian stocks rebounded on Friday as investor sentiment improved after China slashed a key interest rate by a record amount to boost its economy.

On Friday, the Sensex and the Nifty jumped 2.91% and 2.89%, respectively, after recording their worst decline in at least two months a day before.

Positive news from China, with cuts in lending rates and easing of the pandemic-led restrictions, helped boost sentiment globally.

Finance minister Nirmala Sitharaman’s optimism over a robust economic growth outlook for India also likely lent some support to investor confidence, analysts said.

“Market took a complete U-turn from Thursday’s slump as bargain hunting following the recent crash and recovery in other Asian indices bolstered the sentiment back home. China’s central bank cut the five-year loan prime rate to 4.45% from 4.6%, and easing of covid-related restrictions also provided a major leg-up to the market," said Amol Athawale, deputy vice-president-technical research, Kotak Securities Ltd.

Asian indices Nikkei, Taiwan, Hang Seng, Jakarta Composite and Shanghai Composite ended the day with gains of 0.78-2.96%.

In India, market confidence was further boosted by Sitharaman’s suggestion that India’s economic growth is likely to be robust at 8.9% in FY23, said Arafat Saiyed, an analyst at Reliance Securities.

Saiyed added that the stock markets are likely to remain highly volatile amid the prolonged Russia-Ukraine conflict and covid cases in China.

V.K. Vijayakumar, chief investment strategist at Geojit Financial Services, said he expects the volatility to persist and that it may take a few weeks for the markets to stabilize.

The excessive volatility is attributed to two reasons by market watchers.

The first is that the markets have discounted severe monetary tightening by the US Federal Reserve, which is likely to take the Fed funds rate to around 3% in 2023.

Secondly, the markets have not fully discounted the probability of the US economy slipping into recession in 2023. Until there is clarity on the second issue, the ‘risk-off, risk-on mode’ is likely to continue in the near term, Vijaykumar said.

For India, continued foreign institutional investor (FII) selling also remains a key concern. While rising interest rates, liquidity tightening and favourable bond yields in the US are some reasons for FII selling, analysts also say India is the only emerging market where FIIs are sitting on good profits, and the markets provide the liquidity to sell. Thus, FII selling may continue to keep markets volatile.

Foreign portfolio investors have remained net sellers of equities worth Rs1.61 trillion till 19 May.

The continued FII selling is also putting pressure on the rupee, as are high crude prices. Brent crude was trading at $113.32 a barrel.

The rupee again hit an all-time low of 77.7975 against the dollar on Friday, and sentiments have taken a hit over worries that growth would be derailed globally by inflation, rising interest rates and supply chain issues due to the Chinese lockdown, according to the currency desk of Emkay Global Financial Services.

The dollar index witnessed a correction from its 20-year highs of $105 on the back of lower-than-expected economic data: joblessness in the US hit a 10-week high, and manufacturing activity fell to 2.6, its lowest since June 2020, added Emkay.

Analysts said that the volatility observed this week is expected to continue, considering major economic data releases, the current earnings season, and the monthly expiry.

The Federal Open Market Committee (FOMC) minutes, US GDP growth rate forecasts and initial jobless claims will all influence global market sentiment, said Yesha Shah, head of equity research, Samco Securities.

The data on India’s foreign exchange reserves, which were in the headlines for falling to a one-year low, as well as the INR/USD movement, will be keenly monitored, added Shah, who expects the markets will continue to remain bumpy and investors should remain on the sidelines until a clear trend emerges.

US stocks declined as investors weighed the risk to growth from policy tightening against China’s latest efforts to bolster its economy. Treasuries and the dollar gained.

The S&P 500 traded off session lows, after dropping to within 30 points of a bear-market threshold, marked by a 20% slide from its closing high in January. At the end of another volatile week, price swings are likely to be exacerbated by the monthly expiration of options tied to equities and exchange-traded funds.